Supreme Court on payment of advances for profit shares
In its recent judgment (No. 27 Cdo 3330/2020), the Supreme Court (SC) sheds light on the ambiguities concerning the payment of advances for shares in profit. Although the judgment concerns the Business Corporations Act as effective until 31 December 2020, its conclusions may also be applied to the current wording of the act.
The fundamental question that the court dealt with was whether the payment of an advance for a profit share may be decided on by a sole shareholder rather than by the company's board of directors. The law does not explicitly entrust the decision on the payment of an advance to any of the company's bodies, therefore the decision belongs to the company’s board of directors (in the monistic system, to the management board). The Supreme Court further admitted that the statutes may confer this power to the general meeting. If an advance payment is decided on by the general meeting although the statutes do not confer this power on it, in each individual case it is necessary to assess:
- whether the decision may be just a general meeting’s instruction to the board of directors to decide on the payment of an advance
- whether it is a decision on a matter outside the power of the general meeting and shall thus be viewed as if it was not adopted
- whether the decision is a one-time amendment to the statutes (i.e., whether it may in itself include the shareholders’ will to amend the statutes to the effect that in this single case the general meeting is given the power to decide on the payment of an advance.
According to the Supreme Court, each case must be considered on an individual basis. Yet, subject to certain conditions, it is possible for the general meeting to decide on the payment of the advance even if the statutes do not confer this power on it. Such a decision then gives rise to the shareholder's claim to the payment of an advance for a share in profits.
The Supreme Court further established that the decision to pay an advance for a profit share or to distribute profits does not fall within a company's business management.
The court also commented on the concept of sufficient funds for the distribution of profits. This provision was contained in Section 40 (2) of the Business Corporations Act, as effective until 31 December 2020. The Supreme Court concluded that the term ‘sufficient funds’ must be understood as resources. In its opinion, an advance for a share in profits is paid for a share in a company’s own resources that originate from profits, and it is thus logical that the amount of these resources is also the limit for any advance payments.
The judgement also expressly confirmed the possibility to offset a shareholder’s claim (receivable) to the payment of an advance against a company’s claim (receivable).
Although the Supreme Court's conclusions are not surprising to the professional public, this case law will be very beneficial in practice. The court's opinion can also be applied to payments of advances for shares in profits of limited liability companies.